Hedge Fund Returns
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Low-cost futures transactions and traditional assets can be used to replicate hedge-fund return. The findings are in a paper by London's Cass Business School. Hedge funds typically face issues over liquidity, capacity, transparency, due diligence and style drift. High fees are also associated with funds. Synthetic funds are to be preferred to the real thing, the authors find. Investors put up with the disadvantages because they believe hedge funds will generate stellar returns in the double digits. Harry Kat, one of the authors contends that when they discover returns could be as low as 3%, minds might change. Professor Kat, professor of risk management at Cass wrote the report with Helder Palero. The famous returns were unlikely to be repeated given low interest rates, low risk premiums and the size of the industry. Approach of the study was to generate returns "with same statistical properties as the returns generated by the fund". Rationale for the approach is that hedge fund attraction lies in these properties and relationship with returns on investors portfolios. This contrasts with the work of William Sharpe on equity mutual funds, which required knowledge of how the returns were generated.
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